Apr 22, 2019

Why Amazon Is Giving Up on China

What worked in the US and Europe did not work in China, which has evolved more quickly as a mobile oriented market, demanding low prices, top tier western products, competitive local alternatives - and instant delivery.

The company had long struggled to gain traction in China despite operating there for more than a decade. It sells less in the country than in Japan, the smallest market it reports. The company didn’t adapt well to the Chinese market,
which is price-sensitive, favors instant delivery
and a focus on authentic foreign products. Amazon controlled
much of its own inventory and built its own delivery infrastructure. Alibaba chose to focus on
being a platform that hosted an array of smaller vendors and made use of
local delivery companies to help it offer lower prices. The
approach helped Alibaba eclipse Amazon.

Amazon may dominate online shopping in the United States, but in the world’s second-largest economy it is all but calling it quits.

Amazon said late Wednesday that it was closing its domestic e-commerce business in China. The company had long struggled to gain traction in China despite operating there for more than a decade.

Instead of buying products sold locally by Amazon and its marketplace of Chinese suppliers, shoppers at Amazon.cn will be able to buy only some products imported by Amazon’s sites in the United States, Britain, Germany or Japan.

Amazon’s Chinese sales are small enough that the company does not break them out in its financial reports. It sells less in the country than in Japan, the smallest market that it does report, which had $13.8 billion in sales last year, about 6 percent of Amazon’s business globally.

“Over the past few years, we have been evolving our China online retail business to increasingly emphasize cross-border sales, and in return we’ve seen very strong response from Chinese customers,” Amazon said in a statement. “Their demand for high-quality, authentic goods from around the world continues to grow rapidly, and given our global presence, Amazon is well-positioned to serve them.”

Amazon bought its way into China in 2004 with a takeover of Joyo.com, a popular online seller of books, for about $75 million. “We’re happy to be part of one of the world’s most dynamic markets,” Amazon’s chief executive, Jeff Bezos, said in a statement at the time.

It rebranded the Joyo business in 2011 to Amazon China.

Amazon faced fewer restrictions when it entered China than foreign internet companies face today. But the company struggled to compete with a cast of cutthroat local competitors. It also didn’t adapt well to the unique Chinese market, which is price-sensitive for many goods and favors near instant delivery and a focus on authentic foreign products.Amazon initially controlled much of its own inventory and built its own delivery infrastructure. By contrast, Alibaba, the Chinese e-commerce retailer, chose to focus on being a platform that hosted an array of smaller vendors and made use of local delivery companies to help it offer lower prices. Over time the approach helped Alibaba eclipse Amazon.

Other local players that more closely followed Amazon’s model, like JD.com, invested more heavily in logistics and outcompeted the American company, which some argued was distracted by its presence in markets across the world.

In recent years, Amazon has focused more on offering cloud services and its Kindle devices instead of its core e-commerce business in China. Those have struggled under the onus of Beijing’s control.

“There is no other region that has such a dominant competitor and regulatory environment,” said Simeon Siegel, a retail analyst at Instinet, an equity research firm. “You have to wonder if Amazon gave up on China earlier than this announcement,” he said, given how Amazon barely talks about its Chinese business as opposed to other growing economies like India.

Some brands and retailers, like Starbucks or Nike, have found success in China, which has become one of their most important markets. “Nike as a brand may drive more revenue in China than Amazon does,” Mr. Siegel said.

Amazon’s chief rival in the United States, Walmart, has been expanding its business in China, particularly through a partnership with JD.com.

Walmart and its Sam’s Club unit sell on JD.com’s e-commerce sites, giving the American retailer vast access to Chinese consumers. The two companies have also taken steps to integrate their inventories so that the companies can more quickly deliver products to customers shopping on JD.com.

Walmart also operates hundreds of brick-and-mortar stores across China. The company recently opened a “smart supermarket” that can offer home delivery in less than an hour.

Chinese consumers will still be able to buy content like books for Kindles at Amazon.cn, and the company said it would continue other businesses in China, including cloud computing and the services it provides a growing number of Chinese brands that sell directly to Amazon consumers in the United States and elsewhere.

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As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...